Equity securities – ordinary shares
An ordinary share may be either:
- listed – registered on a recognised exchange such as the Australian Securities Exchange (ASX)
- unlisted – held privately by an individual or group of shareholders.
Registration of an ordinary share on a recognised exchange provides for a daily market in the ordinary share, whereas an unlisted share is sold in either in a limited market or in a transaction between two or more parties.
Preference shares, convertible notes, bonds and floating rate notes may also be registered and traded on a recognised exchange.
Valuing listed shares
As listed ordinary shares are commonly traded on a daily basis, you may be able to rely on the appropriate share market as the source for valuing a listed ordinary share.
When you value a listed share, we would expect you to take into account a number of factors in addition to the listed price. These include:
- valuation changes resulting from company capital structural events or changes in retained earnings (for example, as a result of dividend payments)
- the period to which the valuation applied.
If a stock is relatively liquid and does not exhibit significant price volatility, you may, in certain circumstances, refer to a point-in-time valuation (such as the closing price of a share). However, there are a number of tax contexts where this may not be applicable.
A common method of smoothing the effects of illiquidity (that is, thin trading) and volatility of a stock is for a person to adopt the volume weighted average price (VWAP) of the stock over a certain period. You may also adopt the VWAP method if the stock is liquid but does not exhibit excessive volatility. Within a tax context, this method is commonly applied to corporate events and actions.
In addition to the valuation of an individual listed share, the value of a block of listed shares in the hands of one owner will often be derived using the value of a listed share as a base. As an example, depending on the size of the shareholding (in absolute and percentage terms), a discount may need to be applied to take into account the difficulty of selling this block of shares into the market. This is known as the blockage discount.
The application of the blockage discount needs to be based on the particular facts relating to a case. For example, a significant holding of listed shares, in some circumstances, could require the application of a premium rather than a discount.
The value of a company's equity (or significant portion, where an individual legal or beneficial owner could exert significant influence) will often also be derived using the value of a listed share as a base. In such situations, a premium for control would often be added to the value of the company's shares. This would be necessary to account for factors such as the influence a particular shareholder may exert on the running of the company and synergies that may be gained through the acquisition of a controlling holding.
Valuing unlisted shares
Where an ordinary share is held privately by an individual or group of shareholders, applying the appropriate valuation method (or methods) may be more complex.
When you value an unlisted share, we would expect you to take into account a number of factors that may affect its market value, including:
- many of the factors described in Valuation of a business (accounting for the specific interest)
- adjustments – you need to adjust for factors such as liquidity (at the holdings level) and degree of control (actual or effective) and show that these adjustments are appropriate (for instance, you could benchmark a minority interest in an unlisted investment company against a listed investment company operating in a similar environment)
- the rights of other equity and debt holders (which may influence the market value of an ordinary share).
If an ordinary share is held privately by an individual or group of shareholders, applying the appropriate valuation method (or methods) may be more complex.